Columbia Pike Streetcars: Delving Deeper into the Value-Capture Scenario

by James A. Bacon

Last week, I made the case that the best way to finance construction of the proposed Columbia Pike street car line in Arlington was to set up an improvement district along the route and impose a real estate tax surcharge on property owners to pay off the bonds. (See “A Second Opinion on the Columbia Pike Streetcar.“) “If the property owners are willing to go along, it’s probably a good idea. If they balk, it’s probably not.”

In response, I received an email from Eric Balliet, a communications specialist with Arlington County. His email is worth reproducing in full:

Your concern that the County is not asking the primary beneficiaries of streetcar – property owners along the streetcar line – to pay for these improvements is not completely accurate. Local funding for the streetcar will come from the Transportation Capital Fund, which is used for major investments in transportation infrastructure throughout the County. The Fund is supported by a commercial real estate tax rate of $0.125 per $100 of assessed value. This tax rate applies to all commercial and industrial properties – including those along the streetcar line. Before the General Assembly provided this funding mechanism for jurisdictions to improve transportation infrastructure, the County used limited general tax revenue for that purpose, including for development of Metrorail in the Rosslyn-Ballston and Route 1 corridors.

The County also has established tax increment financing (TIF) to capture the property value created by redevelopment to fund streetcar and other priorities. The Crystal City-Pentagon City-Potomac Yard TIF is helping to pay for infrastructure improvements such as streetcar in support of the Crystal City Sector Plan. The new Columbia Pike TIF will dedicate up to 25 percent of tax revenue growth generated by new development and property appreciation in the commercial and multi-family residential revitalization districts to affordable housing along the Pike. This ensures that some of the money generated by streetcar will help meet our goal of preserving existing affordable housing along the Pike as property values and rents increase.

One final note – regarding the capacity of streetcar versus bus: Today on Columbia Pike, nearly 600 bus trips per weekday carry more than 16,000 passengers daily. Buses already come every 2-3 minutes in rush hour. Based on updated regional population projections and County-adopted plans, we need transit capacity of 38,000+ daily on Columbia Pike by 2035 to ensure it doesn’t become gridlocked. There is not enough street capacity for buses alone to accommodate that many passengers. A streetcar vehicle can hold 100% more passengers than a regular bus and 40% more than an articulated bus. Accommodating more people in fewer vehicles is key to keeping traffic moving.

I thank Balliet for educating me about the mechanisms being used to finance the street car line, of which I had been unaware. This information enrichens the debate. I must give the Arlington Board credit for recognizing that commercial interests would be major beneficiaries of the county’s roughly $300 million streetcar investment and for creating mechanisms that would capture some of the value created by that investment to lessen the burden on general taxpayers. That alone puts Arlington’s streetcar proposal way ahead of downstate mass transit projects, such as Bus Rapid Transit in downtown Richmond and a light rail extension in Virginia Beach, which have no value-capture elements of any kind. So, I toff my hat to the Arlington Board.

That said, while preferable to funding the entire county share from General Fund revenues, Arlington’s financing mechanism is still deficient. First, by imposing what amounts to a real estate tax surcharge on all commercial and industrial properties, the board is creating what might uncharitably be termed a slush fund for transportation projects which, by their very nature, benefit some commercial interests but not others. While the mechanism is fair to residential taxpayers, it is not necessarily fair to commercial property owners. Second, using tax increment financing (TIF) to tap 25% of the growth in property tax revenue generated by new development is largely a cosmetic measure. Columbia Pike property owners enjoy the blessings of higher leases and rents but don’t pay any more under this scheme.

To my mind, there are two important benefits to a strict value-capture financing scheme. One is that it is fairer, requiring beneficiaries of the public improvement pay for the improvement. Second, it creates an objective and non-political mechanism for weighing the risk-adjusted rate of return on the improvement. Let’s imagine that we set up a special Columbia Pike Streetcar District and tell property owners in that district (picking numbers for purposes of illustration), “We’re going to add a 25% surcharge to cover the full cost of financing construction of the streetcar and pay for operating costs not covered by fares. In return, you will get a streetcar system which, by our calculations, will bolster your rents and leases by 10% over time. There are uncertainties in all these numbers but we think we’re pretty close. Would you vote for or against this idea?”

If presented with this choice, the property owners would engage in a vigorous debate over the merits of streetcars and the assumptions embedded in the proposal, leavened by their own intimate knowledge of business conditions and property values along the route. Unlike planners, politicians and pontificators, they would have skin in the game. They would have the most to gain if the streetcar is a hit and the most to lose if it’s a bust. They, unlike politicians, would be likely to base their preference not on ideology but upon a keen awareness of the bottom line. They would be far less likely to engage in wishful thinking. If a significant majority of property owners agreed — as they did when they set up the special tax district to finance U.S. 28 improvements near Washington Dulles International Airport — then the public can have far more confidence that the project makes sound economic sense. That’s no guarantee, of course; businesses often bet wrong on investments. But they bet wrong a lot less frequently than do politicians playing with others peoples’ money.

One last note: Regarding for the carrying capacity of buses versus street cars, there is a lively discussion on an email thread initiated by Rob Whitfield. Has anyone considered the economics of running double-decker buses along Columbia Pike?

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2 responses to “Columbia Pike Streetcars: Delving Deeper into the Value-Capture Scenario”

  1. The C&I tax is an appropriate mechanism to help fund projects such as the Columbia Pike streetcar line in Arlington. Fairfax County will dedicate its C&I tax revenues for a number of year to pay for some of the Tysons transportation needs. For a number of years, Fairfax County did not spend anywhere near what Tysons generated in C&I revenues on Tysons area projects. Of course, Tysons also has a service district to pay more transportation costs.

  2. larryg Avatar

    I generally feel that the businesses and their owners should have a significant role in the decisions – and especially those concerning funding mechanisms.

    in the end – what you’re really talking about is potential disincentives to prospective (and perhaps existing) businesses to locate or stay in a place that has a higher tax burden than other potential locations.

    People with actual businesses know the value, the ROI value of such things relatives to the businesses – more /better than folks who are not business people and we need, in my view, something like a real business plan although I will say that Arlington seems to have a track record of success in how they go about these things.

    but any business has to look at it’s costs – including supplemental taxes (which are just additional expenses) – to see if it will be able to offer competitive goods and services at a price that allows them to pay their expenses – and make a profit.

    if a business can sell $2 hot dogs for $3 dollars because of it’s location, then perhaps. but some businesses competitors don’t have to locate in a high-dollar place to start with and others actually seek out the least expensive places to operate and higher tax, tax districts, do have the effect of pushing some kinds of businesses out of that area and into other areas.

    TIF is usually for capital costs not operational costs. Usually TIF is supposed to be a temporary situation where you get to keep some of the taxes that typically go to the govt – to provide services – to essentially invest in infrastructure.

    to have a permanent TIF – meaning you use to money to provide additional services not found in other locations – and STILL receive other govt-provided services – obtained by taxation of every one – essentially means that the TIF district becomes a subsidized district .. where they keep some of their taxes for their own uses, pay less tax to govt – but still get services like everyone else gets – for less taxes.

    the only way you could justify something like that – is as Bacon is saying – that there is increased value – and it generates increased taxes to the govt.

    I can see this for typical TIF-supported infill development but to pay for the operational costs of a streetcar… on a permanent basis… I dunno. Or perhaps I missed that whole part of it.

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